All posts by Jamie MacAlister

Jamie teaches risk and strategy at Hult International Business School and the International Health Sciences University in Kampala, Uganda. He is also an executive coach, facilitator, strategist and commercial manager, having previously been Commercial Director at Ashridge. He has had over twenty years experience as a management consultant with PwC and running his own business, Blonay. He learned about marketing with Procter & Gamble, has an MBA from Wharton Business School and an MA Engineering from Cambridge University.

Assessing risk is impacted by how easily you can change your mind

[Extract from “Risky Strategy” to be published in 2016]

Cognitive inertia (a.k.a in long form Cognitive Dissonance Reduction) is our inability to evaluate a situation objectively, or to come up with new creative solutions,  when we face conflicts with decisions we have already taken.  We experience  Cognitive Dissonance  when we encounter evidence that conflicts with a decision that we have already made and it feels uncomfortable, so we try to minimise that dissonance.  So, we tend to find it hard to evaluate the new evidence objectively or rationally.  This can affect both risk averse and risk taking behaviour.

Let me illustrate with the Game Show Host conundrum. Try and do this without looking at the answer below, because your response to the answer is important.   Then once you have completed the exercise,  read on.

In a game show, contestants are asked to pick between three doors. Behind one of the doors is a prize. As a contestant you pick one door. The Game Show Host then opens a second door, one of the doors you didn’t pick, to reveal the prize is not behind that door. The rules of the game is that the Host will always open another door which doesn’t have the prize.  You are then asked if you would like to switch your choice to the last remaining door. What do you do?

a)  Stick with your original choice, or

b)  Switch your choice to the remaining door

THE ANSWER: Having selected your choice , I will now tell you that the majority of respondents answer ‘a’  But I also need to tell you that you double your chances of winning if you change your choice… you have a 2 in 3 chance of winning if you switch doors, compared to a 1 in 3 chance of winning if you stick with your original choice.

While this may not make intuitive sense, and indeed a number of professional mathematicians don’t accept this outcome, you can prove it to yourself by doing a simulation with a friend a number of times with three cards (an Ace as the prize).  Ask a friend to pick a card, then show them a second card which is not the Ace and ask if they would like to switch their choice to the remaining card. If you do this 10 or 20 times, you will begin to see that by switching to the remaining card, your friend would win the prize 2 times out of 3, whereas by sticking, they only win 1 time out of 3.

This is a metaphor for cognitive inertia, and illustrates something interesting about our intuitive approach to risk.  And it’s a double whammy – it does this in two ways.

Firstly, the idea that we have already picked a door (ie, made a decision) makes it more difficult for us to consider changing that decision.  This is the first level of inertia.  But to switch doors increases our chances of winning, ie, it reduces our risk of losing.  So the change option is actually the low-risk option.

Secondly, there is a much more pervasive form of inertia where we justify our decision based on our own assessment of probability.  Most people think that they have a 50:50 chance whether they stick or switch, so why switch.  But what happens when I explain that actually the odds are twice as good if you switch.  Normally, the initial reaction to that piece of news is “You’re wrong!”, rather than “So how can you show me that that is the case”

It is fascinating that there is, or at least was, an internet site with this problem and solution set out, and a blog of commentary from supposedly leading mathematicians arguing quite vociferously that this is not true, that the odds do not improve or that this is bad mathematics.   And yet, as I suggest, you only need to run it as a simulation enough times to convince you of the pattern, to see that you do indeed double your odds.  So it’s an illustration of how hard it is to stand back from decisions and hard-fought beliefs, and to look at something from a different perspective.

When it comes to risk, are you more tiger or more elephant?

 

[Extract from “Risky Strategy” to be published 2016]

One of our respondents told us that the reason for the success of a major global product launch was the presence of a combination of ‘elephants’ and ‘tigers’ in the launch team.  This technical product needed to be developed quickly but also reliably, to seize an important opportunity in a fast growing consumer electronics market.  This respondent described these two types of individuals involved in the launch process as follows:

tiger & elephant

Elephants are methodical and analytical, have good memories, build momentum, but tend to be slow and grey. These are the formal risk workers who assessed risk using objective, quantifiable and evidence-based outputs. Often working in response to regulation (compliance, governance, legal, industry standardisation), their focus was on high visual sharpness, accuracy and timeliness in an attempt to reduce subjectivity.

Tigers are colourful, fast, intuitive and brave, but if you have too many, you have chaos. They are the informal risk workers.  The emphasis was on breadth, was multi-dimensional, making use of wide channels of information, employing intangible and subjective processes. Informal risk workers used peripheral vision to scan the environment and to provide space for generating hypotheses.  Sometimes referred to as instinct, gut feel or common sense, this requires an inherent ability to consider what is at stake by looking for threat or identifying opportunity. There is no single focus of informal risk; three dimensional, entrepreneurial, holistic and peripheral vision are the words we heard managers use when describing how informal risk perceivers scan their environment.

As we reviewed the responses from our leaders as to how they tended to work with risk, it became clear to us that there were broadly two ways.  There was a formal way, which was all about analysis,  risk assessment, and processes and models. These were designed to work out what kinds of risks were likely to happen, when based on some kind of evidence, and what we can do to reduce the likelihood of a harmful outcome.

The second way was the informal , intuitive way.  These leaders are aware of risk being around them daily, and that many of the decisions that they make daily have a distinct risk element to them. And the decisions they made would be based on some kind of judgements about that risk, with very little overt evidence.

It struck us that the elephant and tiger picture language that our respondent used to illustrate this particular case was a great way of describing these two modes for working with risk. The elephants are the ones who work with risk in a formal analytical way, and the tigers are the ones who work with risk in an informal, intuitive way.

We had the sense that while circumstances may well dictate in which of these two modes risk thinking is most comfortable,  it seemed clear that some people prefer the formal, elephant approach, and believe that is the only way to think about risk.  In fact, going back to our debate around Knightian definition,  they would probably say if you can’t deal with risk in this way, then it’s not risk, it’s uncertainty – and that’s something different altogether.

Others people prefer a more informal, intuitive way of thinking about risk. They may also call it uncertainty.  But they say things like; “I feel comfortable taking the risk” … or “for me, the risk is acceptable”.  It’s a personal assessment, with no overt data. In fact, I would say that it’s this personal fingerprint on the assessment of risk that is a defining characteristic of leadership.

Teaching how to feel safe with risk

This week an Ashridge team won a Training Journal award for our leadership development work with one of our clients, Heineken. https://www.ashridge.org.uk/executive-organisation-development/custom-programmes/case-studies/Heineken/  The essence of the programme is helping participants to experiment with different leadership styles and interventions in high stress situations, which they can do in the relatively “safe” environment away from the workplace.   This is done through a classroom simulation of an organisation in crisis, where actors play roles which create the stress. Participants wear heart-rate monitors, and are regularly evaluating their own approaches and physiological responses, as well as those of each other.  The idea is they develop a kind of muscle memory for the impact of different kinds of interventions and responses in situations involving significant personal risk.

In the introduction to my book, I state that the book is about the journey towards feeling safe with risk, which is the key to effective strategy.

[Extract from “Risky Strategy” to be published in 2016]

One of my stated aims from this book is to help leaders feel safe with risk. This is of course a paradox, yet I believe the reality is that leaders will not take the risks they need to take if they don’t feel safe in doing so.  This is looking under the bonnet of the leader, to understand what might be going on behind the scenes to support right risk taking.  Up to now we have been looking at the outward evidence of risk-taking decisions in organisations, with some exploration of what psychological factors might influence those decisions.  But the deeper issue is how risk makes you feel when you take it, particularly personal risk.

I believe at some level, right risk takers do have a mechanism for helping them to feel safe.  Part of this may indeed be the hormonal effect which not only prepares us with the capabilities to engage more effectively with risk, as in the case of testosterone, but also provides an anaesthetic to numb the fear.  This makes me think of adrenaline, and reminds me of the day my Achilles tendon snapped while playing indoor soccer. I can still remember the excruciating pain in my ankle the moment it happened, as if I had been struck there by the sharp edge of a brick that had been thrown at my foot.  Within only five or so seconds, the pain was already starting to reduce.  The adrenalin was kicking in.  Then I thought I had just been taken out with a tackle from behind. The first aider who took care of me accurately diagnosed it as an Achilles tendon going after a bit of research – no one had been anywhere near me.   But the numbing effect of the adrenalin meant I drove myself to the hospital, even though I was only able to use my heel and not the front of my foot to depress the clutch.

The idea of feeling safe with risk is one of the bases on which we have tried to offer Executive Education at Ashridge.

There is a conundrum. In traditional teaching environments, away from the buzz of everyday working life, how do we replicate the real risks that leaders face, in the relatively “safe” environment of the classroom?   Conceptualising risk for learning purposes appears to have an anaesthetising impact on our actual experience of it.  We may think our way through a case study involving risk in an abstract way, using suitable models to help us; but the emotion of risk is generally missing in a “safe” environment.  Virtually nothing we do or say in a classroom setting will put the company finances at risk, nor the health of our stakeholders, nor our own careers.  To some extent this is exactly why the “classroom” is designed to be a “safe” environment – it’s confidential, it’s safe. “What’s in the room stays in the room?”

Indeed, the  unique selling proposition for “away-from-the-workplace” learning is that it is  a safe environment in which to experiment, in which to take some ‘risks’ that participants wouldn’t normally take in the workplace.  These risks can be about exploring and articulating new ideas to colleagues, about having conversations that they wouldn’t normally have, about interacting with others in a way that may not feel comfortable.  So for some aspects of working with risk, the “classroom” offers an advantage, even if it may feel a little artificial or clinical.

But, paradoxically, if we are creating safety to work with risk, how can this be authentic?

We have successfully worked around this dilemma in our management development practice by using simulations that generate the emotion of risk.  These take the form either of team-based competitive decision making in a computerised market-place simulation over a series of rounds, or of working through specific artificial challenges working with professional actors, whose role it is to re-create some of the emotion of difficult, risky, situations.  Participants have also been asked to wear heart rate monitors over one or two days, as they work together to resolve simulated problems which may be creating tensions between individuals.    Participants are encouraged to experiment with roles which are different from those they would normally have, and with types of interventions which they would typically not employ. Their emotional responses are monitored and measured.

These programmes demonstrate that they can have a significant residual learning impact – i.e. this learning manifests itself after, not during, the experience of the programme.  Participants start to apply certain aspects of what they have experimented with on the programme back at work and they are encouraged, post programme, to reflect and to continue learning from these reflections.  They effectively build on the risk that they have already taken during the programme by applying the experiment in a real work environment.  There is effectively a physiological stress memory, reflected in the heart rate print-out, which gets replayed in the workplace.  This has been called the development of emotional muscle memory, in the same way that a tennis player only really learns how to hit an effective tennis shot when he does it automatically without having to think about it – i.e. when he has developed muscle memory.

Could Federer have won by taking more risk?

 

Yesterday, Djokovic won the ATP World Tour Finals tennis at the O2, beating Federer by two sets to zero.   I was disappointed because Federer had indicated he would pursue a more aggressive style of tennis, in particular by coming to the net to volley more often.  Overall, in 116 rallies in all, Federer lost because he only won 46% of them.  When he came to the net in rallies, he won 65% of the time.   But he only came to the net for 17 of those rallies!   The statistics suggest that if he had come to the net more often, he might have won.   Why didn’t he?  Part of the reason could be summarised in this extract from my book: “Risky Strategy”

[Extract from “Risky Strategy” to be published in 2016]   

My game is tennis, and I notice that an approach to risk is being played out on a point-by-point basis.  An approach can be planned in advance, in the form of an overall match or set strategy, but in reality you have a point strategy, or even an in-the-moment shot strategy.  So how does risk manifest itself in tennis?   Well, one way is in the approaches to the net as shown in the following diagram.  This is based on some fairly rough and ready research of rally length and outcomes in professional games.  The average rally length in a game is around a surprisingly low five to six shots total, so less than three per player.  In terms of winning or losing shots, at the top professional level of the game, this is split very close to 50:50 – it’s surprising how close a lot of professional games are in terms of points won or lost.

Tennis risk chart

So what is this chart showing us?  This is an equivalent to a normal distribution curve for two types of tennis shot: the blue bars represent the distribution for shots played from the back of the court, and the red from the net area.  There are just three points in the distribution for each shot type, as we are only interested in three possible outcomes from the shot; either it’s a winning shot, it’s a losing shot, or the rally continues so that the player gets another shot.

So first to note that our flatter ’curve’ is our more risky shot, remembering the way I demonstrated risk and variability in the earlier chapter. In other words, there is more variability in possible outcome with our flatter (brown) net shot – which is what we would expect. The net shot is more risky; there is more chance of the extreme outcomes, either a win or a loss.

A back of the court shot is less risky; it has a more peaked profile – the most likely outcome from the shot by a good margin is a continuation of the rally.

So what we see from this is that the shot which has a higher chance of winning the point is the shot at the net – ie the more risky shot.

What is interesting is that tennis players know this, and yet the shot at the net is a relatively rare part of the game at the professional level today.  It used to be more regularly played; up until the late 1970s and early 1980s, the serve and volley at the net was a regular way for players to win points, particularly on grass courts.   Of course, there are a number of reasons why that has changed. Tennis balls are slower and make it harder to hit winners.  The perfected top spin ground shot, pioneered by Bjorn Borg, changed everything, making it easier to hit dipping passing shots.  And longer rallies and games means energy is a bigger factor – coming to the net expends more energy.

However, the most interesting feature of this analysis is one other reason why us tennis players are more reluctant to come to the net. Yes there may be a higher chance that the shot will be a winner.  But there is also a higher chance it will be a loser.   And, in the tiger moment, away from rational elephant analysis, our loss aversion kicks in!

Choosing risks and winning aspirations ; the Race to the Pole

[An excerpt from the book “Risky Strategy” to be published in 2016]

We see an intriguing relationship between “winning” and “risk” in the race to the South Pole in 1910, between the English Robert Falcon Scott and the Norwegian Roald Admundsen.  For both explorers, winning was in part at least about being the first to reach the South Pole, one of the last unexplored areas on Earth.  For both, this undoubtedly involved a high level of personal risk, to themselves and their chosen teams. But this is where the similarities end.

Admundsen reached the Pole first, and returned to their ship with a team completely in tact. Scott by contrast arrived at the Pole weeks later;  he and his entire team failed to return alive.

What else was different?  Firstly, their specified goals were different. Admundsen had a single goal: to be the first to reach the South Pole.  It was probably the best example of a clearly defined and focused winning aspiration – easy to confirm or measure success.  Scott had two goals: to get to the Pole first, like Admundsen, and to gather scientific information about the Antarctic.  As a result of this, they each took different types of risks.

For Scott with his dual goals, in a situation where time was a critical factor,he delayed on his return trip to collect geological samples, which also added weight to his sledges.  Admundsen, on the other hand, took a different kind of risk, which was consistent with his winning goal. While Scott chose a route from McMurdo Sound, which had already been partly explored by Ernest Shackleton in 2007,  Admundsen chose an unchartered route, from the Bay of Whales, which was on the edge of the Great Ice Barrier, where explorers had feared that the ice could fracture and send you floating away.  But Admundsen chose this because it was 60 miles closer to the Pole. In addition, because Scott has assumed Admundsen would choose the same route as him, he assumed that he was ahead of him, as there were no signs of Admundsen’s tracks.  With this assumption, he had no compelling driver to go faster.

However, in this amazing story, even though the single-minded winning goal that Admundsen led to certain risks, he compensated for this by reducing risk in other ways. He had investigated the records of other explorers who had been in the area, and noted that the ice had remained unchanged for decades.  So this gave him more confidence in his choice of routes.

Admundsen had also researched the best type of transport to use extensively by spending time with the Inuit Eskimos in the Arctic.  He used dogs which were very well suited to the extreme conditions. Scott, on the other hand, for most of the journey used a combination of ponies, motor sledges and man-hauling. The motor sledges were untested and quickly broke down. The ponies although they could haul heavier loads than dogs were also ill suited – they had no natural vegetation to feed on, sweated through their hides which led heavy ice to form and caused them to sink more deeply into the snow – they all had to be put down.  This left man-hauling for most of the journey, recommended by Shackleton to be the best and most noble approach. But a noble but ill-conceived approach didn’t get the job done.

What this famous piece of history tells us about winning and risk, is that while a winning aspiration creates the need and appetite for risk, leaders need to be choiceful about which risks they take, which ones they work hard to avoid.

 

For such a time as this – students seek new “capitalism”

I was struck by Paul Polman’s comments in this interview that students that he visits around the world are seeing the need to “evolve capitalism and create a more equitable and sustainable form of growth. They get it, they really get this need for change!”   http://www.theleadershipvanguard.com/#/paul-polman/

Last week, I ran two sessions on “Risks in the global supply chain” with undergraduates at Hult Business School – representing a fairly balanced mix of students from Europe, The Americas, Asia and Africa.  We talked about global strategy making, referring to my book, “Risky Strategy” –  there was some interest. I then introduced a case study based on the research we had just completed on modern slavery in the global supply chain, in which we had talked to a number of the UK’s top retailers. The engagement levels increased dramatically.

The class discussions battled with the challenges presented by a capitalist system that requires retailers to compete in the interests of the consumers,  and the need for those same retailers to collaborate to truly be able to tackle this pernicious issue of slavery.  Has the mantra the “customer is king” in reality been translated to mean the “worker is slave”?  Is this particularly the case because the “customer” in value terms is primarily from the wealthy developed nations, and the “worker” predominantly from the poorer developing nations?

Is this a time for business leaders like Polman to challenge these basic assumptions?  Its risky… yes and ..?   Is this a time for business to become part of the solution rather than part of the problem.  The students seem to think so!

 

 

Opportunity for business to take the right risk

As I put the finishing touches to a book which explores risk taking in strategy making,  our Ashridge / Hult report on how business can tackle the ills of modern slavery has just been published.

We talked to the biggest retailers in the UK and the majority believe there is an issue of slavery in their global supply chains.  Now UK legislation is a catalyst to do something about it.  But to really address the issue requires a big change of mindset – and the risk that goes with that.

Small Risky Strategy coverHere is a synopsis of my book on risk and strategy, which concludes with the question: For such
a time as this,  is business part of the solution or part of the problem?

This is a story that brings together and dismantles the well-used, and often abused, business terms “strategy” and “risk” in an exploration of what happens when the two concepts collide. The story suggests that strategy is inherently risky, and that leaders and their organisations need strength of character in order to take the right risks in making strategic decisions. It explores the different ways in which leaders work with risk, and introduces us to formal analytical “elephants” and informal intuitive “tigers”. I look at risk as variability and as crisis – and how this flows through to financial and reputational risk. I look at illusions and mind games that can throw us off the scent. I draw on the philosophy of winning, from business, military and sport perspectives. I consider how leaders select the right variables, and combine analysis with intuition to take smart risks. I look at how they innovate, and how they mitigate the risks of innovation. I think about what makes organisations better at dealing with risk, and what helps us as leaders to feel safer with it. This journey draws from my experience as a lifelong business strategist, and from recent research I have been part of at Ashridge , looking at leadership and risk, and more specifically at the way organisations are currently addressing the confirmed existence of modern slavery in their global supply chains. The story concludes by questioning whether now is a time for business leaders to be proactive as the solution to, and not the cause of, such social issues, whether they need to re-think what is meant by winning, and what implications this might have for taking the right risk in strategic decisions.